Thursday, December 21, 2006

Final Revision of 3Q GDP

The U.S. economy was a bit weaker during the summer than earlier believed as the sharpest housing-sector slump in 15 years took an even bigger toll on the slowest quarterly growth of 2006.

Gross domestic product rose at a 2% annual rate July through September, revised down from a previous estimate a month ago of 2.2% for the third quarter, the Commerce Department said Thursday.

Economists surveyed by Dow Jones Newswires had expected third-quarter growth to hold at 2.2%. The Commerce Department said the revision to GDP, a measure of all goods and services produced in the economy, mainly reflected a downward adjustment to consumer spending.

Consumer spending, the biggest component of GDP, rose 2.8%, down from a previously reported 2.9% increase but above the second quarter's 2.6% advance. Consumer spending accounts for roughly two-thirds of economic activity. It contributed 1.96 percentage points to GDP in the third quarter.

Another GDP component that was lowered was residential fixed investment, which plunged 18.7% in the third quarter instead of the previously reported 18.0%. Housing is bogging down the economy, which grew at a faster, 2.6% rate in the second quarter and 5.6% pace in the first three months of 2006. The drop in residential fixed investment was the sharpest since a 21.7% drop in first-quarter 1991, and cut 1.20 percentage points off of GDP. Second-quarter residential fixed investment dropped by 11.1%.

Yes, the slowdown in housing construction is having a direct impact on the growth of the US economy. But I'm actually much more worried about the eventual effects that flat or falling home prices could have on household balance sheets in most of the US's previously hot housing markets.

Put this together with the precarious financial situation of millions of US households, many of which may be facing default and eventual foreclosure over the next year or two, and I fear that the effects on personal consumption in 2007 could be substantially bigger than the direct impact on the economy of reduced home building.

Contact

The Street Light is written by economist Kash Mansori, who works as an economic consultant (though views expressed here are entirely his own), writes whenever he can in his spare time, and teaches a bit here and there. You can contact him by writing to the gmail account streetlightblog. (More about Kash.)